Alcoa and Rusal benefited from LME warehouse issues: Wall Street Journal

Two of the world’s largest aluminum makers reaped an estimated $1.4 billion in revenues from higher fees amid a logjam at London Metal Exchange warehouses, according to an analysis by The Wall Street Journal.

The two companies, Alcoa Inc. and United Co. Rusal, have emerged as some of the most vocal opponents of an LME proposal aimed at easing bottlenecks at warehouses.

Many analysts say the fees, known as “premiums” to industry insiders, are likely to shrink from record levels if the new warehouse rules are implemented. While the holdups at warehouses have allowed their operators to charge more in rent, the delays also have contributed to a rise in the premiums aluminum makers charge for delivering the metal, analysts say.

Since early 2011, aluminum premiums have jumped, mirroring the growth of aluminum stockpiles in LME warehouses. The combination of large inflows of metal and rules that allowed warehouses to release it at a slower pace resulted in much longer wait times for industrial consumers like soft-drink bottlers and window makers. Critics say warehouse owners were able to collect more in rent due to the longer wait times, while warehouse owners say the pileup reflected the increased involvement of investors wagering on metal prices.

The increased premiums have benefited aluminum producers. Premiums essentially are a surcharge that buyers pay producers or other holders of aluminum—in addition to the price of the metal—to cover handling, insurance and other delivery costs. But in this case, analysts say, premiums are rising simply because demand for aluminum is increasing while warehouses are backed up. Lower premiums would hit a stream of revenue that aluminum companies have come to rely on since 2010, because prices for the metal itself have languished in recent years. Aluminum prices are down 44% from 2008 peaks.

The resistance of Alcoa and Rusal, based in Russia, to the proposal underscores how any fallout from changes to LME’s warehouse system is liable to reverberate beyond Wall Street. To date, big banks have attracted most of the scrutiny from regulators because they own warehouses in the LME system, the biggest of its kind in the world.

If premiums decline, “this is hundreds of millions [of dollars] of profitability that’s disappearing” for aluminum makers, said David Gagliano, who covers metal and mining companies as an analyst for Barclays PLC. “There’s a lot of talk about consumers paying high prices. But who benefited? The producers, and the traders.”

Rusal and Alcoa declined to detail the financial impact of the higher premiums. An Alcoa spokeswoman said the company’s profitability also depends on factors other than metal prices.

Rio Tinto PLC, the other major global aluminum maker, hasn’t weighed in publicly on the LME’s proposal. The company—which derives most of its revenue from sales of iron ore—still likely profited from the higher-than-average premium. According to Journal calculations, Rio Tinto may have posted revenues tied to premiums of $1.8 billion in the last 10 quarters. Rio Tinto declined to comment.

Based on the Journal’s analysis, premium revenue at the three firms totaled $5.6 billion in 2011, 2012 and the first half of 2013. This is up from $2.95 billion in the comparable period through the first half of 2010.

Alcoa and Rusal both have announced production cuts in past months.